Why the market is turning to quality

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favour quality companies.

Oct 7, 2021

2 minutes

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favour quality companies.

After the growth and value rally last year, 2021 has seen a marked shift of emphasis on to actual company results over sentiment and expectation. We believe this should continue, and therefore favour quality companies.

The market has been put on notice that the Fed will begin removing some of the liquidity support which has driven markets.

As a result, we feel fundamentals will be the critical factor in determining which companies outperform. Many of our portfolio holdings have delivered impressive results this year, ahead of estimates, and have been correspondingly rewarded by the market.

With the possibility of rising inflation, quality companies with strong competitive positions and pricing power should be in a position of strength. We favour companies operating in structural growth areas, which are less reliant on overall economic dynamics.

There has been a change in market leadership. Quality is back in favour, and while cyclicals appear supported, value sectors have begun to lag as the strength of recovery has been called into question.

There has been a change in leadership within equity markets that has led to outperformance since the start of the 2021 earnings season

Change in market leadership

Source: Ninety One, Morningstar, 30 June, 2021.
The above chart shows daily returns. The returns are net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD.

Ninety One’s Quality team adopts a purist quality approach, which we have applied consistently over time.

Global Franchise has the highest exposure to quality companies relative to a sizeable competitor universe with no drift in exposure

Global Franchise has the highest exposure to quality companies relative to a sizeable competitor universe with no drift in exposure

Source: Style Analytics, Ninety One, as at 30 June, 2021. Quality tilt shown month on month as the average of managers tilt score to ROIC, ROA, Net Profit Margin, Gross Profit Margin, and Returns Stability. ̒Global Quality Manager’ representative of strategies in either the eVestment Global Large Cap Equity or eVestment Global All Cap Equity universe, who have quality in their strategy name or have stated quality as their equity style emphasis in their eVestment strategy profile, where holdings are available in style analytics or can be sourced from other sources for analysis. The portfolio may change significantly over a short space of time.

Our portfolio companies have attractive characteristics compared to the wider market.

Our portfolio companies have attractive characteristics compared to the wider market.

Source: FactSet, Ninety One, 31 July 2021. The portfolio may change significantly over a short period of time. The above reflects the portfolio characteristics reweighted excluding cash and cash equivalents. Inception date: 30 April 2007.
1. FCF Yield calculation excludes companies classified in the Banks Industry Group according to GICS.

We believe we are at an attractive time in the alpha cycle for the Fund – suggesting relative outperformance may continue.

Global Franchise alpha cycle
Cumulative (A-Acc) outperformance since inception*

Global Franchise alpha cycle

Annual performance in USD (%)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Global Franchise A Acc* 7.4 14.7 15.3 3.5 8.2 -0.1 23.8 -4.5 27.0 15.3
MSCI AC World NR** -5.9 16.1 22.8 4.2 -2.4 7.9 24.0 -9.4 26.6 16.3

Source: Morningstar, 31 July 2021. Performance is net of fees (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD. *Inception date 10 April 2007. The performance is based on the OEIC Ninety One Global Select Equity Fund from 10 April 2007 which then merged into the Luxembourg-domiciled Ninety One GSF Global Franchise Fund on 04 July 2009. ** Benchmark: At inception = MSCI World NR; Current since 1 Oct 2011 = MSCI AC World NR. Highest and lowest returns achieved during a Rolling 12 month period since inception: Feb-10: 54.4% and Feb-09: -38.7%. The Fund is actively managed. Any index is shown for illustrative purposes only.


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Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

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All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security.

The value of this investment, and any income generated from it, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. The Fund’s investment objective will not necessarily be achieved and there is no guarantee that these investments will make profits; losses may be made. This Fund may not be appropriate for investors who plan to withdraw their money within the short to medium term. Performance shown is that of the Fund and individual investor’s performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. It is not an invitation to make an investment nor does it constitute an offer for sale. Before making an investment, please read the Prospectus and Key Investor Information Document, which sets out the fund specific risks and is available from Ninety One SA. The portfolio may change significantly over a short period of time. The Fund is traded at the ruling price and can engage in borrowing and scrip lending and may be closed in order to be managed in accordance with the mandate. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. The Fund is a sub-fund of the Ninety One Global Strategy Fund, which is a UCITS organised as a Société d’Investissement à Capital Variable under the law of Luxembourg. For further information on the Fund including application forms and a schedule of fees and commissions, please contact Ninety One SA. Fund prices and English language copies of the Prospectus, Report & Accounts and Articles of Incorporation and local language copies of the Key Investor Information Documents may be obtained from our website and free of charge from the following country specific contacts: Luxembourg – Ninety One Global Strategy Fund, 49 avenue J.F. Kennedy, L-1855 Luxembourg. In South Africa, Ninety One SA is an authorised financial services provider. The sub-funds offered for public sale in South Africa are approved under the South African Collective Investment Schemes Control Act. In the event that specific funds are mentioned please refer to the relevant minimum disclosure document in order to obtain all the necessary information in regard to that fund.

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Indices
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.